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Arun Chaudhary Education. (2012) 'First Cameraman Documenting the Obama Presidency in Real Time.'

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  CSPAN    Book TV    Arun Chaudhary  Education.  (2012) 'First  
   Cameraman Documenting the Obama Presidency in Real Time.'  

    October 8, 2012
    7:00 - 8:00am EDT  

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>> host: congratulations on the book. it's "unintended consequences" and it's gotten a lot of attention for your ideas. it's quite provocative and interesting. what motivates you to write this book? >> guest: i felt i had something to say. maybe i was frustrated with what i heard in immediate about the economy on both sides of the debate, and felt that it wanted to try my hand at clarifying it. i felt like i needed to make my contribution as best i could, because i done that at bain capital and felt like i need to try something different and it and i had to try to do something that was important. >> host: you mentioned of bain capital. there's a lot of interesting ideas and thoughts in this book. maybe you could tell me where these ideas come from. i these ideas that are developed over a long time from your career in finance? who are your influences in how you think about the economy and what's in the book?
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>> guest: they probably, it evolves from debates i had with young kids that came out of top schools, came to work for first been consulted and bain capital who wanted to argue economics and politics, and i can't think when you get to be 40 or 45, and i think it evolves from that. but i also benefited greatly from a friendship i had with bruce who is a professor at columbia who i was able to make the arguments to any would frankly say you're right on this but you're stepping on a landmine near, and it's not to say he agreed with everything in the book. he doesn't but i think he helped me sharpen up my understanding of economics. but that's really the source. part of it came from my experiences at bain consulting and bain capital. building caucus almost all the value that is created by business is captured by the customer. not by the investors. and investors only capture a small piece which is their
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advantage relative to competitor, and the business is in the race to deliver more and more value to the customer. that competition keeps you honest and delivering more and more value. you are only capturing every small piece of that. i think that plays into the economics that underlie the thinking in the first half of the book. >> host: so tell me if this is a fair characterization, but it felt like there were two real distinct pieces to this book. one, looking at the financial crisis, and one from a larger view the think you're just referring to about how the broader economy worked. let's start with the second one. i wonder if you could, what makes an economy grow? what's the most important things? >> guest: i suppose that goes to robert solow. investment per employee i think would be one. education would be the second, and i think it particular on the
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job training has been my own experience, and innovation being the third. the more that you have the faster the economy will grow, the higher the incomes will be. another way to think about it is how much equity you have or that you at least think you have come and go willingness to take risk, put that equity at risk. and in 2007 and believe you have a lot of equity and willing to assume a lot of your income, willing to make risky investments in innovation, rather than working capital respond to growth in the economy, those things drive the economy, but after the crisis when real estate prices dropped 30% eagerly give a lot less equity, probably to have a lot less than you realize so you rein in risk-taking and economic activity contracts to just forgive a equity you have. you start saving instead of consuming to build back your equity reserve, and you start dialing down economic activity to compensate for the less equity you have. you feel less comfortable taking
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this. i think that's on a macro level, what makes the economy and and flow in the short run. on the long run, i think it goes back to robert solow, the investments are making in the long run is driving up the growth rate in the long run. >> host: you reference this current situation we are in. you're focusing on the availability of capital, the level of equity you have. where does the man fit into this? currently a lot of people focus on the debt overhang of the middle class and sort of the lack of demand is the reason they're not investing. if you read the business press, if you kind of talk to business people i talk to, that's what i hear more than lack of a capacity to invest. >> guest: i believe that demand is a symptom, it's not a cause. and that the underlying cause of demand is the amount of equity
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that people have. so homeowners, particularly the middle class, who had almost all their financial investment in the house and now it is down 30%, suffered even a higher loss of the equity. i think they dialback the economic activity, chiefly consumption, and that they try taking a different consumption as a way to increase their equity, and that causes demand to decline. so i think when you think about the problem this way, i think you say any money that a take from one person to give to another to increase the other person's demand will be offset by reduction from wherever the money came from. and so they came see a multiplier effect think you are much more skeptical of that emphasize it would become you tend to be more on the, lack of better word, rational expectations can't, that people will look at the total amount of risk being taken into make some
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intuitive reduction. >> host: one of the things you really emphasize is, particularly and the longer-term discussion, is the importance of taking risks and the importance of innovator risk, investor risk. why don't you talk about the a little more. i thought that was interesting. the role of risk particularly, into willingness and ability to take risk to make the economy grow. >> hostgrow. >> guest: i make the argument that payoffs for risk-taking drives the amount of risk-taking that we get. and it's probably true that if we increase the tax rate we will get a rapid contraction in another risk taking but that is a compounding effect that can grow quite large overtime. in the same what if we stopped investing this year, it's not like economy would collapse. it will gradually slow down over time. and so higher payoffs for risk-taking, one is the they increase the bar for success.
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the united states most talented people work longer hours while their counterparts in europe and japan work fewer hours. the rest of the economy as people have grown richer they've had a reduction in the amount of work that they've done. so that's one of the things that's happened, keeping up with the joneses if you will. that work effort and the risk-taking that it represents creates companies like google and facebook in countless of other companies, innovations that we have enjoyed in the united states more than in europe and japan. and that creates valuable on the job training for our most talented workers. and so again you get the training and increases your probability for success, you have a network of engineers, business people who are familiar with what's going to be successful in the internet, for example. that has a magnifying payoff, increases the probability for risk-taking. and the third is that success puts equity and as a people are willing to underwrite the risk that produces innovation him at
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those three things compound and gradually build over time. and we end up with an economy that grows faster, has higher median wages, faster growing employment in europe and japan have enjoyed over the last two decades. >> host: it seemed like in the book you talk about different kinds of people who take risks, and one of the groups, what i will call the innovators are the people who start these businesses. i know you've talked about the people who take the risk of leaving a security implement, leaving google to go start a new thing. you focus on increasing the pay off for that, and kind of your argument purloining taxes, for lowering the taxes on kind of a payoff. i think one thing that i thought in thinking about that that i thought was interesting was
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that, because i've known people who've been in that position. i know a group of people, my father actually who made a choice like this, and sometimes have asked me for advice and we discussed it. what i thought was interesting to me was some of it is they just have a cool idea and they want to go explore it and want to go do something different and it's exciting to some of it is definitely there looking at this possibility of life-changing wealth. that's definitely an attraction but i must say, at least in my experience, like if it's life-changing wealth, if it's 10% more, 10% less, that isn't a big difference for them. but do you think in that situation do you think sort of a difference in like the range of possible tax levels is a big factor? >> guest: i think we all know before the fact when mark zuckerberg took risks i'm sure he never expected to be as wealthy as he was so we know he's willing to take the risk for a much, much lower payoff. i think is what you are
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describing. certainly it's hard to argue with that. by think thomas edison said success is 1% inspiration, 99% perspiration. i think business is a team sport. if you look at something like google or facebook, attracting the size of the team that you really needed to make facebook successful when myspace didn't succeed and many of the other things didn't succeed, takes i think a lot of money and have to lower abroad people away from a lot of googles and other companies in order to really be successful. and you see what happens on facebook. they say we can't afford to give equity to guys who were sitting in my dorm room that are going to create the value that needs to be created going forward. you can see i got who how much do sophisticated investors decided they needed to pay deliver a leader away from google chrome not only because of that one person as if one person could do it all, but because that represents a certain of i'm with shareholders
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about what's going to great value for the person and for the company generally, and a team that she can assemble around her to be able to do it. some board of directors decided at yahoo!, for example, that that was the price to get the person that could really bring the entire team together that could make the companies success. i'm not trying to argue whether it was a wise decision or not, but i think every day shareholders and investors and board of directors look at the very economics you are describing and to come to the conclusion, even when we're not talking about entrepreneurial risk-taking in advance of the outcome, that these are the kind things you need to do to make companies successful. so i do think the argument is like if we lower the incidence a little bit will have a big impact in the short run out of legal have a big impact but i think in the long run they do compound as i described, look at the u.s. versus europe and japan. ice ice assist in the day, 26 --
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california greater 26 of the top 500 largest companies in the world. europe has created one during that timeframe going back to the 1970s. why is in europe and japan able to produce the kind of innovation, the kind of growth, the kind of employment and the kind of middle-class became wages that the u.s. economy has produced? often people say we have entrepreneurialism in our blood, but we didn't grow our economy faster until 1992 when the commercialization of the internet. if anything our productivity was growing slower than theirs was. our product movie -- one and a half of this two-pointer coming from innovation. they move from one and half to two, to one, to one and a half. i just don't think that god blessed america with entrepreneurial blood. i think we earned it the old-fashioned way. will work harder, to more risk,
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made more investment if you count the salary of thinkers and innovators as part of what investment is, which our manufacturing accounting doesn't. other accountings have made those calculations and we are investing significantly more. i think we earned it. >> host: the policy differences that you point to between europe, japan and the united states certainly predate 1990s. so why do see the emergence starting then? >> guest: i do believe that imparted think that we were able to capitalize on the internet and it really unleashed the level of innovation. they were not in a position to cap life. in the book i argued that roe v. wade changed the equilibrium in politics. it made pro-investors who are lined with the religious right stronger politically, and the reagan administration lowered marginal tax rate, reduced regulation to open up the trade
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borders and in those things ultimately lead to higher payoffs for successful risk-taking and that that compounded over the course of 25 years to create the differences that we see today. part of it i'm sure is just circumstances and perhaps luck as well. it's hard to know what all the different factors are. but certainly i believe that starting company in the u.s., you see it, google, facebook, ebay, amazon, adobe, cisco. why have no companies been created in europe and japan along those lines? you just don't see it. >> host: one thing you mentioned earlier, pretty prominent in the book is solid on the job training but i think of it as a cluster. you get a cluster of businesses that sort of build up momentum, so you have, in those companies have a lot in common in terms of the industry they are in and, i mean that cluster was forming in
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california, particular during that time period, and you make the point that it is set on itself exciting part of it is getting at the root of why did that for the we've seen other clusters historically in the united states. research triangle in north carolina, route 128 around boston and that sort of thing. do you have any thoughts on what created that cluster that sort of got those companies going? >> guest: i think in part its early success, first some see, microsoft for example, intel. certainly they will cluster around, scratch your head and wonder why clusters did over in europe, clusters didn't occur in japan of this tight. but i also think that people in america really were driven to not going to get in a software degree or an mba and going to go out to silicon valley and going to get a job at one of these companies and going to walk with my job and try to create something new and innovative because the window of
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opportunity has opened. i believe the internet, one thing that is left out of the equation is what does the structure of unrealized investment opportunity look like. i think the internet opened up a unique set of opportunities for us that we're much more entrepreneurial, innovative and really took a lot of talent and thinking that produced to capitalism what opportunities we have available to us. why it didn't occur in europe and japan, i think in part they just weren't motivated to say i'm going to take the risk. when you look at it, our people were walking away from companies like intel and my process, what with the european and japanese walking away from? young europeans have very high unemployment rate and pretty poor growth prospects for the crew. they weren't even walking away from anything. and still people didn't go to
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europe and say i'm going to start my startup because the pool is rich and there aren't many competitors chasing after the talent in that pool. they went into the united states because i think they just thought the opportunities, the ground was more fertile and the chances were better. >> host: one reason the ground was more fertile, it does help if some of the best universities, you know, in the world and particularly i in the research area and a lot of the algorithms that ended underpinning they came from government research grants. we have the department of defense which always wanted us to be at the very cutting edge of technology. we had the internet was originally a way for government scientist to communicate with each other. clearly that basis is sort of the big reason silicon valley got started and we sort of had this critical mass and created the fertile ground and on the job training and kind of the kind of interaction that helped
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us. >> guest: i would say it's possible. i'm skeptical of it. and skeptical of it for two reasons. when you think about the internet, think about all the commercialization of it that has occurred since 1992 or three when they came up with the browsers. almost all that has been done by private enterprise to very little of it i think was done by the government. and so the second is i don't know about you but when i think back to what i learned in school, all learning occurs on the job. it's highly specialized. and that you really learn by doing over the course of your career very little of which are taking away from school. that's the thing that made me successful. aside from the fact that proving that you're a capable student and things like that which a think is an important credential to earn, and when you look at the u.s. universities versus the european or japanese universities you don't see big differences in what an undergrad student is receiving from those universities. i think you see small differences.
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they don't seem large enough to account for the big differences of success in the u.s. versus europe and japan so i look inside yet, it's probably some of the competition but i would see it as small not large. also if you look at where the innovation has come from, it has not come from r&d, science-based a physical science-based breakthrough. most of it has come from commercialization of the internet which is not as scientific and research based as we typically think of as occurring in universities house of representatives my undergraduate degree is in electrical engineering and look what i'm doing. i take your point. i vaguely remember the three laws of dynamics. so yeah, i take your point but my point is less would've the undergraduate, i don't know we can argue but how important that is, but more, i take your point about the commercialization and the browsers and all that was
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definitely private, occasional borrowing for more basic research, but my point was that seems like a really critical element was sort of just was the critical mass of people out there, and the guys who founded google were guys who were getting their ph.d's at stanford, you know, and they developed an algorithm out of their training. and just the fact that she did have people working on systems engineering, and it's less the undergraduate but more the government finance, dod research, networking capabilities and all that. look, it's sort of unprovable but there is a story that the critical mass that few -- field itself is built up out there and if you want an explanation for why it happened here and so little happen if their. >> guest: one thing i would say is this.
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in leading up to 2000 women got to the peak of the internet valuation, before people at work their whole life to get a job at bain were walking out the door with the kook used internet ideas trying to get rich because you couldn't, it was hard to get people to stay out of places of employment and a new some professors at harvard who described it as everybody has a business plan. it's an incubator for internet ideas. those valuations had an enormous impact what i saw on talented people and the willingness to take crazy risks. and you see that i think as well in state lottery. whenever there's a big jackpots it doesn't increase the probability you expected value, but just the high payoff. everybody out there buying lottery tickets. and also think you see in education. you are the students are working the hardest, and tend to be the honor students who are working to big differentiation in their
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success. and a credential that they earn. and what i found at harvard business school, the guys in the middle, i work hard and still in the on going off to play tennis. the guys at the bottom who are at risk of failing, they were working hard going if it does work a little bit harder you could have a big impact on whether i stay or go, and so whenever the payoffs got large, relative to the amount of work, i always observed a very big difference in the amount of work that people were willing to do the risks they were willing to take, crazy risks feeding up to 2000. >> host: i would say i think the business school population particularly likely that calculation. >> guest: but i think what comes to the team sport i think you find a lot of those businesses who are motivated to get rich, very caring a lot of water on the team that really makes those companies successful down in the trenches. i think we have a myth that there's two guys in a dorm room, they cracked the code and it all falls in place and you end up with facebook. you don't see myspace and 501
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the winkle boss dwindling on the side of the road not having achieved success. it seemed debatable how original the idea facebook is nevertheless it's the one that prevails. for more than just a guy in a dorm room good idea what you do for the pure passion of the. >> host: fairpoint. japan was dealing with it, the asian debt crisis, europe was absorbing eastern your. so in kind of the aggregate growth differential -- [inaudible] >> host: now i understand what you're saying. but i just think in terms of the aggregate growth numbers, it seems like more complicated story that we have more incentives, lower taxes and less
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regulation. >> guest: we come since 1990 can increase the total hours of work about 12%. europe, france, largely because northern europe, southern europe, the left always wants to pick the north, the right always wants to pick the south. i always want to pick a german as the neutral territory between. i think france is essentially flat during that period. germany is down for 5%. japan is way down like 10-15% in total hours worked. it's not from a lack of people, if you will. 25 to 30, 35% more hours per working age adult than they do. it's not that it is a logical often take vacation because you can take vacation here if you want. i think we are using restrictions on number of hours
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worked, to work over more people. it's just a matter of vacation you wouldn't see come in 2007 when u.s. unemployment was essentially zero, they still have very high unemployment, of their young people. you think the one place where you would want the low young employment is with young people who will take over over the next 50 years or so but i think you have to look and say something bad was going on, something that if you your druthers i don't think he would've picked that. >> host: japan i think it is, actually there i would point at something, women not working in japan. i think it would point to something like that in the case. i somewhat share your skepticism based on culture. but i think in japan it's a fair argument. added to think also so we can take vacations here but they also, they have laws. they have made conscious societal choices as they become wealthier economies that part of
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the return on that success is they're not going to work as hard. >> guest: i would interpret that as a giveaway. they have laws. it's not voluntary vacations even though i'm sure they're glad to take it. they are spreading a lot less hours over more people to get the people employed with the hours that they have. and you can always take a lesser career hit in more vacation and lower paid if you choose. our pay is 25% higher on the median wage, 30% on the meeting which. so when apple to grow and put more hours and more employment even with higher wages. if you go back, and the statistics for 1990 but if you drop back to 1980, we employed, created 40 million jobs. half of those jobs are at the highest end of the wage scale of which about 125% of the jobs in the 1980s with the high-end of the wage scale. it's not like we had a nation of hamburger flippers. we brought 20 million immigrants
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into our economy. there was insourcing over the last 25, 30 years. jobs for the fans, we employed their children, we employed tens of millions of people offshore. i think it's hard to make the case of the u.s. economy hasn't done more for the middle-class and working poor than any other high wage economy. if you look at wages or income per employee, perhaps we could have restricted the amount of employees who came into our economy as a way to push up the wage rate, but what we did was increase the amount of employment relative to europe and japan. we can debate whether japan, go back to germany and france really, the two most comparable comparisons. and they are very different economies and have different outcomes as well. >> host: we will take a break right now.
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>> host: so, you obviously attach a lot of importance to investors taking risk. you think it's an important part of drawing talent into the important new industries, and i wanted -- could you paint a little bit more of a picture of how that works? and to talk about how the tax rates that matter a lot, whether wealthier people are willing to take these kind of risk and make these kinds of assessments. so are we talking about wealthy lawyers, doctors and accountants and lobbyists, or can you sort of walked me through what are the choices they are making,
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that doesn't matter for the economy and how their tax levels expecting those changes? >> guest: it's a very complicated question because i think most of the productive investment is being done by business, of which are doctors and lawyers are buying the equity of those companies. so in some ways it's happening in direct. the question is whether tolerance for risk, are they willing to let those companies make long-term investments for the future, or are they risk averse and rather invest in debt instead of equity, they would rather get a steady stream of income because they want to consume the income in the short run versus, say not consuming it for quite a while. and so the question becomes how to their demands get translated on to the managers of companies? so if you're paying dividends is going to make your stock go down or if you withhold the cash and hold onto, would you make or stock go up? i think what you see is the
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microsoft of the world and googles, they say we need to do is hold a lot of cash because what we're really doing in some ways is we are incenting entrepreneurs to get that cash if you will by creating the next instead ran or whatever experiment will lead to something that we will value and that will use our money which is what the shareholders money, to buy what emerges as successful or begins to emerge as successful. so the linkages are not linked directly from the shareholder to the venture capital. it occurs indirectly through a series of linked, but i think are they responsive to shareholders. what you see any is is a lot of pay for performance, much more options than it has been in europe and japan. it's changing over time which incensed financing team to take the steps necessary to increase the value of the share. they are putting a lot more
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bonuses in place in the u.s. because my experience in business that managers managers are risk-averse. the value of the group is very hot and if they take a legitimate risk and fails, they often lose their job and you never get back in again at the level they are at. that rarely ever happen so they tend to be risk-averse. they think more about their career if they want to minimize the amount of risk they're taking because they don't want to put their careers in jeopardy and it really takes shareholders and boards of directors and incentive systems to push him to take the risk. and i think it's a question of what to shareholders rather, what are they pushing for? both of those linkages are admittedly direct. there's a second thing that occurs, what risks are they willing to underwrite and how did they get value out of the marketplace. >> host: who is willing to underwrite? >> guest: any investor. he's got the funny part and then had to risk underwriting part
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which is a lot like insurance syndicate if you will. so the risk averse investor, you cover my losses ever lose money. say a credit default swap. so what that syndicate values, with the punters risks i think motivates investors and entrepreneurs and managers to say the payoffs are here, the payoffs are there. i'm trying to get something for the internet. i'm not trying to program cnc machine. in germany they are trying to program cnc machines. our programmers are working to get the next nstic rand they can sell to facebook for a billion dollars of stock. >> host: i guess, let me focus in on this a little bit. what i didn't hear from you is so how does your marginal tax rate effect that investor i'm a
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doctor, lawyer? i get the indirect connection but how does the potential tax liability from the investment affect how they then affect the behavior, managers of business? >> guest: it compound slowly over time. so how does this affect him tomorrow, if you get the timeframe so short that almost has no effect at all. but nevertheless, it does have an effect and you see that effect compounded over time. so people say you saw in real estate, the value of real estate is going up. i'm going to buy a second home, i'm going to start taking real estate risk as an investor which you are doing in effect underwriting real estate risk as an investor. and that drives builders to want to build more and invest in companies who want to build more houses come and things like that. when internet valuations went up in 2000, people are motivated, they respond to those valuatio
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valuations. but it's indirect. >> host: i understand that where does taxes get into this? >> guest: so if we up the taxes say to double, we think it would be less risk-taking. i think we'd see a shift from consumption, from investment to consumption because we can capture a value of dollar. the question is whether you get a dollar 50 value and making investment. if it's not $1.50 but $1.25 of think he would say people are going to invest less. you might say we increased the tax rate so that will get cat down to the consumer. the investors is for this risk i've got to $1.50, therefore got to price the product at $1.75 in order to get the $1.50. so i piled high taxes onto the customer. the customer maysan not lling to buy at $1.75 so not going to buy the next new thing. i'm just going to stick to the old thing. that is i think what drove the difference between european --
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an example of this is labor redeployment cost. in the u.s. labor redeployment costs were very low. as we redeployed our labor from the manufacturing economy to a services economy very, very quickly, ultimately ended up with more employment and higher median wages. europe was in effect a tax on labor redeployment because they said his company still suffer the cost, society does and the worker does so we will charge the company for that cost. s. what? they didn't redeployed deliver as much. they defended their factor. we said let's move from manufacturing to the next innovation. we need to quickly move. so we transformed our economy. they were slow to transform. we see chairman has a little bit of success at the moment but when you bet on the u.s. economy and when you bet on manufacturing-based economy i think that growth prospect looks pretty poor because they were not able to make the transition because of the tax on labor redeployment. i believe it has an effect.
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>> host: i want to come back to labor redeployment. i thought that was an interesting part of the book. going back to tax. your premise is that people are making a decision between -- even i income people who, you know, are certainly high income people consume that you were saying they are making the choices about investment versus consumption, based on taxes. i sort of imagine, i'm a, not sure how rich were talking about but at some point you of certain level of wealth, it seems to me people kind of by what they want and then they invest the rest. but you are saying you think actually that they buy more if tax rates were higher. you think i would have an important impact. >> guest: all the time i take the point it takes a lot. yes, i think, yes, but i would
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say it compounds gradually over time into the point where what you want, i think what is lost in this equation is how do you really get rich as an investment. you satisfy customers. customers are what makes you rich. they say you're the guy who is satisfy my needs, not that guy over there who is not getting rich. so what you really want, talent people to be doing, you want them, i'd say at least five times more value of space for the customer than the investor, probably 20 times. in bain it was five times. i think it's highly defensible but argued let's not get us is, it's probably 20 times were valuable. look at the price of google versus a productivity change a get from using google. so what do you want? you want talent of people to be driven out of their minds trying to keep up with other talented people who have taken the risk and gotten successful. and what you see in 2000 is that i had a friend that made a whole
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bunch of money with some crazy internet started. i can't bear the idea that i'm working at bain make a lot of money and there's a guy out there that made more money. i've got to quit and take the risk to try to get even more. and so i think investors in the same way are driven to take more risk and underwrite the kind of risk that produces those breakthroughs, they're looking for the cure for cancer as opposed to say i'm going to buy aaa bonds or government guaranteed debt that will pay me a modest income from that investment, but i'm not taking any where near the risk because the government will take 50% or 75% of it away. so why should i? if it's a matter of that gets passed onto the customer, then it just raises prices and customers as i don't want to buy it. >> host: but do you think lower tax rates have an effect on the risk profile of an investment portfolio? or that it is consumption versus investment?
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>> guest: i think it does two things. i think it motivates talented people to take more risks that allows you to accumulate equity. faster. and as you commit more equity, more equity per employee, or perceived that the equity is going up because we don't know how much equity we have. that people will start taking more risk across the board but as consumers get richer they will spend more of their income and hoard less of it in a savings account which can be withdrawn overnight. it's a difficult to underwrite business with that. as investors get richer, either because they make wise investment or they created google or facebook through risk-taking, i think there are far more willing to underwrite venture capital and things like that. when you come to the recession, and asset thousand and 30% which could be the equivalent of increasing taxes by the same amount, the big one time shot so, what happened? people said i have a lot less
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equity, therefore need to dial down the risk-taking and you get less economic activity. if people look forward to the future and see higher taxes they recognize that means they have less wealth and, therefore, should dial back the risk-taking but it don't think the issue is taxes. the issue is government spending. to spend money have to have taxes. that's a people look forward to in the future determine how much equity they really have to underwrite the risk they want to take. i think right now people look forward into the future and they see that they have a lot less risk than they thought they had in 2007, and this is the economic outcome. it looks a lot like europe. >> host: first of all no one is talking of 50 or 70% tax rate. i just want to be clear of that. even me. do you think that wealthier people take more risks than middle income? ethnic you see that -- i shall, i believe i shall in the book a
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from the fed consumer survey which shows the assets which are owned by various -- we all know that the rich guys have more of the assets relative to the income. i think it's a range of like life, five and at times but and more of those assets our busine assets which create jobs as opposed to housing assets which are largely just your own consumption. or savings, overnight checking deposits, which is are difficult to create a long-term investme investment, again into the financial crisis which underlies. it's difficult to put those risk of savings to work if you don't have an invested -- and equity investor willing to take the risk. so i do think business investment, small business owners, large business owners who are really underwriting the risks that create jobs that great the innovation that gross income. >> host: maybe i'm using the
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word risk in a less technical way. it strikes me that, i mean the actual risk, risk faced by high income individuals seems pretty small to me. i make on any given investment might not do well. on the other hand, a portfolio is unlikely to all the bad. it's likely to do well in recent history, given, i mean we've seen the fact that the rich have gotten a lot richer than the low end middle income people have. those have been good returns, were as something has become kind of endemic to being middle class these days is actually facing a lot of risk. job loss risk its i think you're saying something different when you're talking about rewarding risk. >> guest: i think it's the risk that produces innovation. it's the risk that produces the
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20 to one payoff for consumers over investors. so i don't think anybody would argue that there's a middle-class person who's at risk of losing their job or having health care. they face enormous risk? they do. is that the risk that employs other people, that grows the economy, and increase the income of other people, that increases the satisfaction of customers? unfortunately no, i don't think it is. and remember, we went from the 1950s when large companies were capitalizing on mass-market, general motors, proctor and gamble, exxon, to a service economy which shifted much more towards smaller local plumbers, doctors, lawyers, you name it, too much more of an innovation-based economy where innovators created very large breakthroughs that have really propelled our economy. those are the risks that drive the economy.
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forward. >> host: this earth can expect in terms of middle-class risk to the notion of redeployment of labor -- >> guest: i know what is going to see. the whole economy has grown risky and riskier in his foundation. and innovation-based economy is riskier than one that is exploiting the mass market. and that risk has been pushed out only to investors, which it has in part, it's also been pushed to employees. we don't have defined benefit contributions anymore. people of all areas and and things like that. they are much more prone to being laid off in a recession than they were in the past. there's much more risk that i like the entire economy. and it's been pushed off to everybody. we also -- we also say would it be nice to go back to the 1950s, and have an economy that was less risky, or we could push it all off on equity investors and not having had any impact and all the employees could enjoy a more stable working environment.
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we could do that to the government, if you will. i think there's a certain amount of risk you are willing to take and you take off the workers and push it on to the equity investors, they will simply dial down the risk-taking to compensate -- you will have a general contraction or slowing of the growth rate of the economy. it's kind of a zero-sum game in that sense. >> host: although i do think most people's perspective in this country is that the risk currently faced by middle-class people who might have their labor redeployed is much greater than the risk actually being felt, faced by high earned income and vested. it's hard to disagree with it. >> guest: i think of making a moral point as opposed to an economic point. unfortunately, i don't think that risk drives up the growth rate of the economy and create jobs. >> host: actually in a way to because to some extent that risk is labor redeployment and you think that risk is sort of beholden on people that might
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lose their jobs can use it as an economic thousand. >> guest: but i do think we did it in your. i think they tried to solve the problem by pushing it onto businesses, and what they got was less employment, slower growth, lower median wages then we have enjoyed in the united states. and i think it's going to get worse, not better because when you look at the structure of the economy, 20 years 30 is behind the transition that our economy has already made and have not made that transition successfully. i know we are suffering and we are frustrated and angry, but let's watch the movie unfold. i think we're going to see them suffer far more than we have. >> host: this begs the question about manufactured what is brain infection fit into your vision of an economy, of the u.s. economy? >> i think that in the long run you can't make for $20 which can buy for 1 dollar because you can use that $19 to hire a doctor, a
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nurse, a schoolteacher, which is, a truck driver. so you will grow increasingly uncompetitive if you don't take advantage of that dollar an hour later to assess this edible, if labor is free how much should you buy? all of the. it's 1 dollar. that is the world we do live in. so we do have to transition from jobs that can be from goods that can be manufactured overseas and floated on a boat to a local service economy, driven by innovation. and we've made that transition and we have hired median wages and faster growth in europe who's been very reluctant because of the high labor redeployment costs to invest in making the necessary transition. but it's not as though the u.s. economy could outsource everything because they would have no income to buy anything. so there will always be a u.s. economy but it will become increasingly that local service economy. i think there's also want other misunderstanding which is prior
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to 2000, 85% of the lost manufacturing jobs were from domestic productivity gains, not from offshore and. and since 2000 would've been an increasing trade deficit it's about 67% has come from productivity gains. i think of it a bit as agriculture. food was 25% of gdp. it fell to 10. that power and the productivity gains in manufacturing today powered the growth in the service economy. >> host: just to stay manufactured for second. the 1 dollar versus $19 i'm not sure it is, that is one type of manufacturing, and in many areas u.s. workers are much more productive so i think the reason we so they're pretty robust, albeit declining manufacturing sector is there are a lot of areas where u.s. workers are way more productive. so the difference in pay is offset by the productivity. >> guest: we produce more and more goods and more and more
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value added. >> host: the other thing you mentioned earlier was he you mentioned intel. one of the reasons why i think that we have been successful in the high-tech sectors and the internet is, in fact, we have both manufacturing and software and sort of the server-side of the industry here, so that even apple which we think of as make everything in china but a lot of the high end chip manufacturing processors is done here. intel does that, samsung, all these companies, and there's a lot been written, a lot of analysis about actually the importance of having innovation close to the manufacturing floor simply because there's a feedback movement and all that. it seems like manufacturing, even if you're focused on innovation economy, seems like manufacturing still should be part of the picture. >> guest: i'm more skeptical than most but i think if you
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really go to chip fabrication, highly, highly capital intensive, it's a unique, it's unique in unique in a way relative to other manufactured. i think a lot of what's been pushed off to the chinese classic widget manufacturing, you can put it on a ship, six-month leadtime, very little profit in. i think if you -- >> host: by making the distinction. >> guest: the capital we deploy, we put it into google, facebook. >> host: i'm not sure germany is making plastic which is either. >> guest: i would accrue if you. i don't think they can peek in that area either. but i think the are making machines that are their shipping to china. i think germany is worrisome in the future. >> host: let me get back to redeploy of labor. what you characterize as a moral question, which is, i mean, we have accepted, better or for worse, greater voluntarily -- volatility in the economy. what does that mean in terms of
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people's lives, in terms of the somebody who is lost their job, they have mortgage, kids, this set of responsibilities and their skills may not match what in this volatile economy they need. i mean, you are sort of embracing the volatility of the economy. what do you offer that? >> guest: it's obviously a very tough question because in the creative destruction process, people are going to suffer. we know that. unfortunately though i think that when you adopt the european approach, which is to say, people are suffering, somebody needs to pay for the. the person who should pay for that is business, because they created the suffering. and there's a certain logic to it. the business is all i do is serve a customer so have to push the cost onto my customer. so if my customer won't pay the cost, then i'm going to be driven out of business. if you're going to do that you to close the borders down
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because there's always a company in china or in the u.s. or whatever that says i don't incur those costs, therefore i more competitive and i am willing to price below you, so you have to closure border to build implement the policy. in which case you close yourself off from lower cost labor and ways to redeploy your capital. you say let the chinese deploy these plastic widgets and i will deploy to google and facebook. the effect over that -- the effect of that over 20 years has been without a significant increase in employment since 1980. 40 million jobs have been created in the trendy. on a base of 100. 40% increase. europe and japan are less than half the level. so i to think in the end, who has the net suffering? i believe europeans have suffered far more over the last 20 years despite the fact that many individuals in the u.s. have suffered for this. i don't deny it, but they have suffered far more. the people are really suffering in europe art their children. the reading their children for the benefit of the benefit of
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older workers. what they get instability for the older workers but they get no jobs for the younger worker because companies don't go what i want to start my company up in europe. they say i will go to plant outside of your. i will employ workers outside of europe because of the cost of redeploy workers in europe is i will to the rest of the world. you can do it but i think they'll and at the cost is higher not lower, even though there is certainly something that goes along with its. >> host: i don't want to get into a debate over numbers but i really do think japan is different. they don't accept immigrants essentially. they have declining population. very job growth numbers -- numbers -- >> host: also i think, i do think the european situation in looking at germany's in these countries, that there are different ways to sort of measure economic success, without getting into sort of well beings and those things.
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>> guest: look at the 25-year-olds, right? that's the easiest way. you want to be 25 in germany, france or the u.s.? >> host: i don't speak german. i'm not 25. people always speak to me in german because of my name, michael ettlinger. so what should someone making over $10 get tax? what percentage of their income she would be at the of them in federal income tax? >> guest: i don't know the answer to that. i would say before taxing at about 16%, we're spending -- gdp. we're spending at 24. we needed 50% across the board increase at every tax level. we could pretend that upping it from whatever we're at now 35 to 39 is going to put everything back in order. but it's not. we need much bigger increases, and i think we should stop pretending we're going to get an economic rebound. it's been four years. we haven't seen the rebound you. so the art when i try to make in the book is what more is i go to
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the middle-class, 11-dollar increase on a rich person is making $10 billion a year, in the case their puppy saving more than 40% of income by use 40% in the book because that's the guy who had like a couple hundred thousand dollars. would he rather have the end, redistribute or would you rather have the fight from investment? by mike at least he would rather have the investment, more valuable. >> host: we have four minutes left and i've three things i want to do. one is i just, you know, i want a quick response, which i'm just going to point out that the point in time where you note the deviation is where bill clinton raised taxes, and if you look over time you will see that marginal tax rate, we've had higher growth rates with that higher marginal taxes in this country than we have not. so give me a brief response to that observation bill clinton, i think the nasdaq went from 800,
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to 4500 entries in a pail for successful risk-taking and about of equity that people had overwhelmed any marginal tax increase he imposed. so one is positive, the other is negative. is overwhelming. go back to the 1950s, you have 20 years, two decades of underinvestment from world war ii and the great depression. you have a g.i. bill putting everybody through college. you mix the whole mass markets together with television -- >> host: so other things matter more. >> guest: a lot more. >> host: next, i want to read you one sentence, or two sentences from your book and ask you quickly what you meant by the. when all is said and done you're either for investment and risk-taking as a solution for what ails the economy, or you are against the. the real world offers no middle ground. >> guest: i think republicans versus democrats, and i think the argument is do you put your faith in private enterprise as the person is going to invest capital in the middle class or
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deeply the government can invest that tax and redistribute it and invest that money more successfully on behalf of the middle-class? and there is no middle ground. those are the two philosophies. there is no guy in the middle because i think if you read the next since it says you have to a compromise with the religious right if you're on the investment camp in order to get a majority. what i'm referring to is there's no middle ground. >> host: i would respectfully say i think the way you articulate sort of the anti-investment position it's a bit of a caricature of what i think. so i want to read my, i think maybe my favorite quote from the book. and it starts out as a quote from a stanford economist douglas bernheim, and i read. stanford economist douglas concludes as an economist one cannot review the ball in his literature on taxation and saving without being somewhat
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humbled by the enormous difficulty of learning anything useful even about the most basic and empirical questions than you, unfortunately the same is largely true of all of economics. and less you use empirical evidence that defies economics and decide for ourselves which set of beliefs seem most possible. sob want to say thank you because i think you have done an effort to do that in this book, and you of your point of views on it and others will but i think the enterprise you describe in that passage in the book is really sort of what we are kind of all trying to get to. >> guest: i agree. >> host: thank you. >> guest: thank you for having me. >> that was "after words," booktv's signature program in which authors of the list nonfiction books are interviewed by journalists, public policy makers, legislators and others familiar with the material.
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"after words" airs every weekend on booktv at 10 p.m. on saturday, 12 and 9 p.m. on sunday, and 12 a.m. on monday. you can also watch "after words" online. go to booktv.org and click on after words on the upper right side of the page. >> here's a look at some of the upcoming book fairs and festivals that are happening around the country. ..

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